If there is a recession in the next one to two years, there is also likely to be another bear market for stocks…[and this article] shows why the base case for a new bear market could be a two year inflation-adjusted loss of 36%, which would exceed anything experienced in the 1960s, 1980s or 1990s.
…If history (on average) repeats itself, what should we expect with the next recession and bear market? A very simple and somewhat conservative approach is to take the smoothed average (“smoothed” because we are looking at annual to annual, instead of the worst case scenarios of highest daily high compared to lowest daily low) of the two previous stock market losses that we have experienced in these cycles of higher asset prices and high PE ratios.
- The inflation-adjusted average value of the S&P 500 in 2000 was 2,081 (2018 dollars), and it fell to 1,391 by 2002, which was a 2 year decline of 33.2%.
- The inflation-adjusted average value of the S&P 500 in 2007 was 1,788, and it fell to 1,107 by 2009, which was a 2 year decline of 38.1%.
- A simple average of the 2 losses is 35.65%, which rounds to 36%.
On a simple basis then, this would imply that the base case scenario for the S&P 500 in the event of another recession would be about a 36% loss over about the two years or so after the peak year.
This simple average is illustrated below. The yellow bar for 2019 is the inflation-adjusted average of the S&P 500 for the first five months of 2019, which is 2,800, and that level is extrapolated forward for the entire year. The yellow bar for 2020 takes the average of the first year losses from 2001 and 2008, and shows an average value for 2020 of 2,252.
The yellow bar for 2021 takes the average of the two year losses, and shows an average value for the inflation-adjusted S&P 500 of 1,802 for the year 2021, which is a decline of 36% from the average for 2019…
Editor’s Note: The above excerpts from the original article by Daniel Amerman have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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